Legislative Update Presented by Kim Rhead, MERS Legislative - - PowerPoint PPT Presentation

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Legislative Update

Presented by Kim Rhead, MERS Legislative Outreach Director

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1996: HB 6229 / PA 487 of 1996

EVIP: HB 4328 / PA 59 of 2013 Road Commission Best Practice HB 5301 / PA 466 of 2012 HB 5302 / PA 506 of 2012 HB 5313 / PA 507 of 2012 Unfunded Accrued Liabilities SB 1129 / PA 329

• f 2012

Publicly Funded Health Insurance Contribution SB 7 / PA 152 of 2011

1996: HB 6229 / PA 487 of 1996 Market Conditions in 2008 – 2009

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Compliance

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Liability Bonding Bill

• Allows municipality to issue a municipal security to

pay all or part of the costs of the unfunded pension liability or OPEB liability

• Existing Defined Benefits Plans must be closed to

new hires

• Available only through December 2014
• Several requirements established that need to be

met to bond for unfunded accrued liability

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Partnering with You

• Working collaboratively with MML to assist

you with EVIP Category 3 compliance

• Recent bill introduced to clarify treatment of

MERS HCSP regarding PA 152

• Regional Teams available to assist you with

managing/reducing your pension and OPEB liabilities

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Actuary Report

Presented by Alan Sonnanstine, MERS Chief Actuary

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Annual Actuarial Valuation

• An important tool to help you budget for your municipality’s retirement

benefits, with information specific to your municipality's retirement plan

– As a multiple-employer plan, MERS establishes a separate trust for each municipality – Each entity is responsible for the employer contributions needed to provide benefits for its employees and former employees

• Provides to you as a snapshot of your MERS Defined Benefit Plan as of

December 31 each year

• Provides insight to your plan’s liabilities, funding levels, contributions for

both the employer and employee, and important GASB Information

• The information in the report will provide you contribution rates for each

division for your following fiscal year

– If you are reviewing the valuation for December 31, 2012, the rates go into effect the first day of your fiscal year in 2014 – Rates are designed to be level as a percentage of payroll for open division

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Actuarial Assumptions and Methods established by the Retirement Board

How is the Employer Contribution Calculated?

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Assumption and Method Changes

• Reduction in the 2015 and 2016 wage inflation

assumption, to better reflect near-term economic conditions in Michigan

• Increase in the minimum funding requirements for

poorly funded closed divisions

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MERS Continues to Grow

100 200 300 400 500 600 700 800 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2011 2012 Municipalities Defined Benefit Plan and Hybrid Plan Participants Defined Benefit Plan and Hybrid Plan Participants Municipalities

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MERS Becoming More Mature

Active Members Per Pension Recipient

1 2 3 4 5 6 7 8 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2011 2012 7.5 6.4 5.7 5.6 5.9 4.6 3.6 3.1 2.7 2.2 1.8 1.3 1.2 1.1

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MERS Becoming More Mature

Benefits as a Percent of Pay

5 10 15 20 25 30 35 40 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2011 2012 3.0 3.1 3.5 3.1 3.1 3.8 5.1 7.1 10.5 14.2 19.7 28.6 31.2 34.5

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Distribution of Funded Percentages

2011 and 2012 Valuations

20 40 60 80 100 120 140 160 180 200 Under 50% 50-59% 60-69% 70-79% 80-89% 90-99% Over 100% 27 57 131 178 130 76 107 38 58 136 178 125 68 108

Number of Municipalities

(Excludes 15 Closed Municipalities)

December 31, 2011 December 31, 2012

67% of all municipalities in MERS are funded at 70% or higher. 15% of all municipalities are funded at 100% or more. The average funded percentage is 80% in 2012 and 81% in 2011.

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Distribution of Contribution Rates

The average employer contribution rate (for divisions open to new hires) is 15.14% in the 2012 valuations, and 14.35% in the 2011 valuations. Employer contribution rates vary between divisions as a result of differences in demographics, benefit provisions, and cost-sharing arrangements.

50 100 150 200 250 300 350 400 450 500 0.00% - 5.99% 6.00% - 11.99% 12.00% - 17.99% 18.00% - 23.99% 24.00% & Over 234 476 332 155 251 270 434 294 149 262

Number of Divisions (Excludes Closed Divisions and Closed Municipalities - see Table 1)

December 31, 2011 December 31, 2012

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2012 Actuarial Valuation Results

• Every MERS employer stands on its own
• Average funded percentage of employers decreased slightly

– Normal increase from amortization schedule (+1%) – Assumption changes (+1%) – Offset by 2008 market loss (-2%) – Other experience: retirement, mortality, disability, new benefits, etc. (-1%)

• On average, employer contributions increased by around 9 cents on the

dollar, in order to head back toward 100% funded

– Increases due to the financial markets (2008 market loss) – Increases due to amortization policy – Decreases due to assumption changes – Decreases or increases due to changes in active member pays – Other changes due to changes in benefit provisions and other experience

• Most MERS employers remain in a very strong financial condition

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Comments on the Financial Markets

• Dramatic price declines in 2008
• Average 10+% annual market returns in 2009-2012
• Still plan to meet the average 8% investment return assumption

(30 year return is 9.3%, even with 2008 in the average)

• 10-year asset smoothing reduces volatility in the required employer

contribution and funded percentage

• 12/31/2012 smoothed assets equal 114% of market value

– Need future market returns in excess of the 8% assumption, to make up for 2008 experience – Otherwise, employer contributions will have to gradually increase over the next 5 years

• Policies ensure that any contribution changes are incremental as
• pposed to steep

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What Does the Future Hold?

• MERS will remain in a very strong financial position

– For employers that have regularly remitted the required contributions, all benefits will be paid – Most MERS employers have assets equal to many times their current benefit payout

• A better than 8% market return is needed to avoid increases in average

employer contributions (to make up for 2008)

• Small divisions will continue to have more volatile actuarial

valuation results

• Closed divisions will continue to experience increases in required

employer contributions of about 5-10% annually, until full funding is reached

• MERS will continue to mature

– More retirees and higher benefit payout – Gradually declining employer contributions (once market losses are made up) – Normal for a prefunded retirement plan like MERS

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Investment Update

Presented by Jeb Burns, Chief Investment Officer

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Current Economic Environment

• Global growth expected to accelerate into 2014 as

Europe strengthens

– Eurozone recession ended this year – Expected to remain below trend as deleveraging continues – Expect moderating yet stable growth in China

• World inflation subdued amid excess capacity and stable

commodity prices

– Political unrest in oil producing countries may result in supply disruption and higher prices

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Current Economic Environment

• US housing market recovery expected to be accretive to

economic growth

– Home prices nationwide have risen for 18 consecutive months

• US fiscal policy expected to affect growth and increase

uncertainty in markets

• FED expected to continue unprecedented monetary

stimulus into 2014

– Withdrawal of stimulus likely to increase volatility in global markets

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Investment Life Cycle

Contributed by Jordan Kotick, Head of Technical Strategy of Barclays

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Disciplined Investors Prepare for Unexpected by Using Best in Class Governance

Strong Policy Governance Strong Investment Team Market Research Judgment

Portfolio Diversification

• Preservation of Capital
• Liquidity for a

Mature Plan

Continual Reviews

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Economic Environment

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Performance vs. Fear

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It Really Was That Bad!

It is different this time

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1 Year Chart of the 10 Year Treasury Yield

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5 Year Chart of 10 Year US Treasury Yield

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Interest Rates and the Fed

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Policy Response to Unemployment

Unemployment Unemployment U6 10 Year Treasury

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Single Family Housing Starts and Unemployment

“More Better”

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Global Debt Levels

www.economist.com

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Top Ten Countries Deleveraging

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What Deleveraging?

Source: Bianco Research (via The Big Picture)

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Consumer Debt Decrease In Q1 ’13

The next problem?

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MERS Roles and Responsibilities

MERS Retirement Board

• Acts as sole fiduciary and sets general

investment policy

Investment Committee

• Serve as the Board’s investment policy

development arm

• Approves recommendations to hire and fire

core mandate managers

Portfolio Review Committee

• Internal decision making group
• Makes recommendations to Investment

Committee

Office of Investments

• Responsible for day to day investment

management activities

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Defined Benefit Portfolio Overview

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MERS Long-Term Objectives

MERS Defined Benefit Investment Objectives Investment Rate Assumption 8% Return Strategy Preserve Capital Real Rate of Return Consumer Price Index (CPI) + 3.5% Historical CPI As of 9/17/13 1.5% As of 9/14/12 1.7% As of 9/15/11 3.8%

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Investment Results

20.6% 18.5% 7.0% 5.7% 7.3% 4.2% 8.7% 11.5% 11.4% 4.4% 5.2% 7.5% 6.1% 7.8% 19.1% 10.6% 1.9% 8.2% 4.1% 5.6% 11.5% 11.4% 4.4% 5.2% 7.5% 6.1% 7.8% 10.4% 11.1% 4.9% 5.3% 7.1% 5.8% 7.7%

• 5.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% One Year Three Years Five Years Seven Years Ten Years Fifteen Years Twenty Years S&P 500 Index Barclays US Aggregate Bond Index MSCI EAFE Index MERS Total Fund MERS Policy Index Actuarial Assumed Rate

July outperformed the three year by over 50bps with positive absolute returns for every time period July returned 10.82% for the three year

As of June 30, 2013

As of 6/30/13, 25 year return: 8.55%

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Growth of $10,000

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000 $55,000 $60,000 $65,000 $70,000 $75,000 $80,000 $85,000 $90,000

Apr-88 Oct-88 Apr-89 Oct-89 Apr-90 Oct-90 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Oct-96 Apr-97 Oct-97 Apr-98 Oct-98 Apr-99 Oct-99 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13

Dollars Time Periods

MERS TOTAL W Overlay MERS Policy Benchmark Actuarial Assp. 8.0% CPI PLUS 3.5%

$81,068 $76,549

$68,484

$47,198

As of June 30, 2013

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Management Objectives

• Enhance the portfolio’s performance and efficiency
• Maintain above median peer rankings for three, five, and

ten year time periods

• Integrate and develop industry best practices into MERS

portfolio management model

• Outperform Policy Benchmark for the three year period

Net of Fees

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Peer Comparison

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MERS External Investment Managers

Fixed Income

First International Advisors, LLC

Domestic & International Equity Management Alternative Asset Management

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MERS Internal Asset Management

• Domestic Equity Indices

– S&P 500 Index (Large Cap) – S&P 400 Index (Mid Cap) – S&P 600 Index (Small Cap) - 2014

• Domestic Equity Active

Management

– Micro Cap

• Short-term Fixed Income

Portfolios

– Dedicated Cash – Commodities

• Tactical Cash Management

$1,550 million External Management Internal Management

As of June 30, 2013

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Cost-Effective Investment Management Fees

Total Portfolio* 21.54 bps Portfolio Income** 6.10 bps Net Portfolio Expense 15.44 bps bps = Basis Points or 0.01% 100 bps is equal to 1%.

* Total Portfolio expenses paid from cash (Annualized) ** Portfolio Income = Securities Lending and Commission Recapture As of June 30, 2013

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Participant Directed Account Overview

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MERS Program Asset Totals

Defined Benefit Plan $7.0B Defined Contribution Plan $ 421.2 M Retiree Health Funding Vehicle $ 436.0 M Health Care Savings Program $ 74.4 M Investment Services Program $ 8.6 M 457 Supplemental Savings Program $ 9.7 M Total $ 7,949.9 B

As of June 30, 2013

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MERS Investment Menu

• Historically, participants have had to

make a lot of complex decisions in a self-directed plan

• MERS sought to improve participant
• utcomes by developing a strategic and

streamlined investment menu

• The MERS Investment Menu has a

concentrated list of options to provide quality over quantity, following industry best practices

– Options are grouped into four logical “sleeves” that participants can identify with, which assists in simplified decision making

• Default fund for the

MERS Defined Contribution Plan

• Nearly half of

participants are in the MERS Retirement Strategies funds (47.6%)

MERS Retirement Strategies

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Benefits of MERS Investment Menu

• MERS is the fiduciary, meaning we have an obligation

to place the participant’s interest first in making any decisions about the plan

• The MERS Retirement Board and the MERS Office
• f Investments:

– Actively monitors and select the fund lineup and investment managers – Ensures quality investment options are offered – Negotiates fees that individuals would not be able to negotiate on their own

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Retirement Strategies Target Date Funds

For those who want a simplified way to invest

• Complete diversified investment fund
• Assets change from aggressive to conservative

as participant approaches selected retirement age and through retirement

• Default investment selection, based on projected

retirement age 60

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How the Glide Path Works

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Diversified Portfolios MERS-managed portfolios

For those who want a fully diversified, professionally managed portfolio they are in charge of changing

• Professionally managed by MERS
• Customized to participant’s risk preferences
• Each have target allocation mix rebalanced

(or readjusted) quarterly

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How Diversified Portfolios Work

The four funds to the right are made up of varying segments of the MERS Total Market Fund 80% Stock 20% Bond 60% Stock 40% Bond 40% Stock 60% Bond 20% Stock 80% Bond

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Expanded Funds Building and fine-tuning your own portfolio

For the investor who knows their goals, risk tolerance and time horizon and wants to build or add to their current portfolio

• Gives experienced investors a variety of funds

to select from

• Can be a great addition to the other categories

and help to further diversify investment portfolio and fine-tune strategy

• MERS actively monitors the selection of funds to

ensure quality

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• Gives access to over 1,000 additional

investments:

– Individual securities – Mutual funds in a variety of share classes

• Certain restrictions apply

Self-Directed Brokerage Window More choices for experienced investors

For the experienced investor who wants access to even more options

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Benefits of MERS

• MERS takes on fiduciary responsibility

– We proactively maintain the IRS qualified status of plan

• We actively manage the investment menu to

ensure quality funds are offered to participants

• Fees

– One of the greatest benefits provided by MERS is our ability to pool assets – We follow the Department of Labor fee disclosure rules

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Selection and Monitoring of Menu Options

• Performance exceeding 50th percentile of peers
• ver last three years
• Institutional share class availability
• Morningstar rating of three stars or higher
• Expense ratio better than peer average
• Stability of the investment team
• Reputation of the fund company
• Outside mutual funds must meet

above objectives

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MUNICIPAL EMPLOYEES’ RETIREMENT SYSTEM 1134 Municipal Way Lansing, MI 48917 800.767.2308 Fax: 517.703.9707 www.mersofmich.com www.mymers.mersofmich.com

This presentation contains a summary description of MERS benefits, policies or procedures. MERS has made every effort to ensure that the information provided is accurate and up to date. Where the publication conflicts with the relevant Plan Document, the Plan Document controls.

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